IAS 41 - Agriculture (detailed review)
This standard provides the guidelines, to deal with the accounting treatment of biological assets and agricultural produce at the time of harvest, related to the agricultural activity along with related disclosure requirements in the financial statements of the entity.
- The requirements of this standard are applicable for the accounting treatment of biological assets, harvested agricultural produce at the time of harvest and related government grant in some circumstances.
- This standard is not applicable to:
i) The further processing of harvested agricultural produce after it has been harvested from the related biological asset. IAS 41 is applicable to the agricultural produce only at the time of harvest, it will be covered under IAS 2 or other applicable standard after being harvested
ii) The property, plant and equipment and intangible assets which are used to maintain or develop such biological assets or agricultural produce, as per IAS 16 and IAS 38
Products after further processing
It is the process managing, undertaken by the entity, for the biological transformation and harvest of biological assets for the purpose of sale or to convert it into agricultural produce or into further biological assets.
The harvested product of the biological assets of the entity is termed as agricultural produce.
It is a living plant or animal
It is the process which encompasses production, growth, reproduction, and degeneration of biological asset that result in quantitative changes or change in attributes of the biological asset such as
- Production of agricultural produce in the form of milk, wool, fruits, tea leafs and timber
- Improvement in the quality and creation of additional animals and plants
Costs to Sell
The additional costs which are directly related to the disposal of an asset (such as transaction cost) other than Interest costs and income taxes are termed as cost to sell
It is a process undertaken to detach the produce from the related biological asset. It also includes the cessation of life processes of a biological asset.
Government grants are covered under IAS 20, and these are defined as assistance by the government in the form of transfers of economic resources to an entity, as a result of entity’s past or future compliance with certain specified conditions relating to the operating activities of the entity.
It entails broad range of activities such as, livestock management, plantations, cultivation and cropping, forestry including fish farming. The agricultural activity has the following certain ordinary features:
- Biological assets have capability for the quantitative changes or change in attributes, as result of biological transformation
- The management involvement which enables the biological transformation by providing and maintaining the conditions essential for the process to take place such as temperature, light and fertility.
Therefore, harvesting from unmanaged sources such as de-forestation and ocean fishing does not constitute to agricultural activity and are not covered in this standard
The entity is required to recognize a biological asset or agricultural produce of the biological asset, when the following criteria are met:
- The asset is controlled by the entity arising from past event
- The future economic benefits related to the asset are probable to flow to the entity
- The fair value less cost to sell or cost of the asset is reliably measurable
The entity is required to apply the following rules for the measurement of biological assets and the agricultural produce of the biological assets:
- Biological assets are measured at fair value less cost to sell both, on initial recognition and subsequently at each reporting date, other than the circumstances when the fair value less cost to sell is not available
- The agricultural produce of the biological asset will be measured at fair value less cost to sell, at the time of its harvest from biological asset. The fair value less cost to sell determined on initial recognition of agricultural produce will be the taken as cost for its subsequent accounting under IAS 2 or other relevant standard.
- The fair value of biological asset and harvested agricultural produce will be determined as per IFRS 13 however, the entity should also consider the following points:
a) The entity is required to determine the fair value of its biological asset and harvested agricultural produce without considering the effect of future sale commitments under the contracts as the fair value reflects the current market conditions
b) In certain circumstances the cost may be equal to the fair value such as, in case of newly seeded plant or when biological transformation has not substantial impact upon the price of the biological asset
- If the fair value of a biological asset attached to the land is not determinable on individual basis, but the fair value of combined asset i.e. (agricultural land, land improvements and biological asset) is available, then the entity will determine the fair value of biological asset by the deducting the fair value of land and land improvements from the fair value of combined asset.
- If the fair value of a biological asset is not determinable on its initial recognition, because of unavailability of quoted prices and alternative measurements for the fair value then in such circumstances the entity will measure the biological asset at cost less accumulated depreciation less accumulated impairment loss. This provision is applicable only on the initial recognition of biological asset however, the entity will measure such biological asset at its fair value less cost to sell as it becomes available
- This standard takes the stance that the fair value less cost to sell of the harvested agricultural produce will always be determinable at the time of its harvest.
Gains and Losses
The entity will account for any gains and losses related to the biological asset and harvested agricultural produce as follows:
- Any gain or loss on initial recognition of biological asset at fair value less cost to sell will be reported to the statement of profit or loss. A loss will arise when the fair value less cost to sell of biological asset is lower than its purchase price and a gain arises on the initial recognition of biological asset which is newly born
- Similarly any gain or loss on subsequent re-measurement of biological asset at each reporting date, at fair value less cost to sell will be reported to the statement of profit or loss
- The gain or loss on initial recognition of harvested agricultural produce at fair value less cost to sell will be reported to the statement of profit or loss
The entity will account for the government grant which is available for biological asset as follows:
1) If the biological asset is measured at fair value less cost to sell, any government grant available for such biological asset will be accounted for as follows:
a) If the government grant is unconditional, it will be recognized in statement of profit or loss, when it becomes receivable
b) If the government grant is conditional, it will be recognized in statement of profit or loss, when related conditions are met.For example, if a government grant is available for cultivation in a certain specified area for a period of 3 years, the related grant will be recognized in statement of profit or loss when the 3 years have lapsed
2) If the biological asset is measured at cost less accumulated depreciation less accumulated impairment loss, because its fair value was not determinable, then any government grant available for such biological asset will be accounted for as per the requirements of IAS 20
The standard requires the entity ti disclose the following:
- The total gain or loss recognized on initial recognition of biological assets and harvested agricultural produce during the current year
- The gain or loss recognized on subsequent re-measurement of biological assets at the current year end
- The details for each class of biological assets classified into bearer biological assets and consumables biological assets
- The details of biological assets which are pledged
- A statement reflecting reconciliation between the carrying value at the start of the year to the carrying value at year end
a) Gain or loss due to change in fair value less cost to sell
b) Gain or loss due to change in attributes of the biological asset
c) Decrease in carrying value due to harvesting in the current period
d) Additions as a result of business combination
- Details of change in fair value less cost to sell due to price changes and changes in attributes of the biological assets
- Details of any prevalent material risk related to biological asset such as a particular decease
- The biological assets which are being measured at cost less accumulated depreciation less accumulated impairment loss, the entity should disclose the following:
a) The details of biological assets
b) Explanation that why the fair value is not determinable
c) Method used for depreciation
d) Carrying value at the end of accounting period
e) Useful lives
f) Any impairment loss recognized in the current period
g) Disposal gain or loss of any such biological asset
- The details of any government grant related to the agricultural activity